Last week, the Eleventh Circuit unanimously affirmed the grant of summary judgment in a declaratory judgment action that sought to create coverage solely by estoppel. Wellons, Inc. v. Lexington Insurance Company, No. 13-11512, 11th Cir., May 16, 2014. In the district court action, the insured contended that, because Lexington provided it with a defense without an allegedly adequate reservation of rights, it was estopped to deny coverage, under both a CGL and umbrella policy, for a verdict of more than $8 million. The heart of the appeal concerned the specificity required in Georgia for an effective reservation of rights, following the Georgia Supreme Court's World Harvest decision.
The Eleventh Circuit concluded that a reservation of rights need not specify each and every potential basis for contesting coverage as long as it fairly informs the insured that, notwithstanding its defense, the insurer does not waive its coverage defenses. The Eleventh Circuit determined that the World Harvest court only recommended, but did not require, that an insurer provide the specific basis for the reservation. Thus, the court concluded Lexington's oral reservation of rights, which indicated simply that a defense would be provided "subject to a ROR," was sufficient, where no dispute existed that the insured had accepted the defense with knowledge of this general reservation. Importantly, the Eleventh Circuit also rejected the insured's attempts to engraft the Georgia Supreme Court's Hoover decision, which involved the circumstances under which coverage defenses may be waived where they are not raised in an initial disclaimer letter, onto a reservation of rights analysis.
Additionally, the Eleventh Circuit determined that because the insured failed to provide timely notice under the umbrella policy, Lexington was not obligated to provide a defense. The court also concluded that because the defense was at all times being provided under the CGL policy, there was no affirmative act (i.e., the provision of a defense) by Lexington as excess carrier that could create an estoppel. Finally, although the Eleventh Circuit declined to reach the issue of whether Georgia law imposes an extra-contractual duty to defend under an excess policy whenever it is clear that its limits might be reached, the court stated in a footnote that, had the issue been reached, it would conclude that the American Familylanguage to that effect was dicta, and not the case holding.